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By Clare Baldwin and Maria Aspan
April 13, 2011 4:35 PM EDT
JPMorgan Chase & Co said its total outstanding loans shrank for the fourth consecutive quarter, raising questions about the banking industry's ability to boost profit in coming years.
First-quarter earnings rose by two-thirds, but that increase came mainly from a drastic cut in the amount of money set aside for bad loans, a move that could be difficult to repeat over the long term.
The bank's book of consumer loans shrank 10 percent in the quarter and loans to corporate customers did not increase enough to make up for that. The No. 2 U.S. bank also took $1.75 billion of charges linked to collecting payments on bad mortgages and foreclosures and said an upcoming settlement with regulators over mortgage servicing abuses could force it to hire as many 3,000 people.
The quarterly results were the first from a major Wall Street bank. They beat expectations, but raised concerns about lending profits, and bank shares broadly edged lower.
"The only way banks can grow earnings over the long term is to grow assets, which isn't happening," said Malcolm Polley, chief investment officer of Stewart Capital Advisors, with $1 billion under management.
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"Assets in the industry are stagnant at best, and they will not grow in the foreseeable future."
Analysts and investors said a good deal of banks' ability to grow in the future will depend on an expanding global economy, which will spur demand for loans, stock and bond underwriting, and other services. An acquisition outside the United States could help generate higher profit, too, analysts said.
U.S. retail sales rose only modestly in March as auto sales fell from the month before and consumers faced higher gasoline prices.
JPMorgan earned $5.56 billion, or $1.28 a share, in the first quarter, up from $3.33 billion, or 74 cents a share, a year earlier. Wall Street analysts, on average, expected $1.16 per share, according to Thomson Reuters I/B/E/S.
The bank set aside $1.17 billion to cover bad loans, down from $7.01 billion a year earlier. The smaller loan-loss provision resulted from lower credit losses for many types of loans, including credit cards.
Credit improvement was a key factor in regulators allowing JPMorgan in March to boost its dividend after stress tests.
JPMorgan shares are cheap, Wells Fargo analyst Matt Burnell said. The shares are worth 1.8 to 1.9 times their tangible book value, but are trading at only 1.4 times their fiscal 2011 year-end tangible book value, he said. The shares are discounted because investors are looking for loan growth and are uncertain about ongoing mortgage business costs.
PRE-PROVISION PROFIT OFF
Chief Executive Jamie Dimon is often credited with skillfully piloting his bank through the financial crisis, but many investors are now looking for signs of revenue growth.
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